Examination of Witnesses (Questions 40
- 59)
TUESDAY 18 OCTOBER 2005
ROYAL MAIL
GROUP
Q40 Mr Weir: The point is that any
business might want to mail out. You say it takes 4,000 customers.
Any business at any one time might want to mail out to 4,000 people.
They will not be doing it every day but they may wish to do it
on an occasional basis. Is it not right that they ought to have
the ability to do so?
Mr Leighton: They do. The issue
is that only two per cent do. Where do you draw the line on this?
As I say, if you leave it in there all it will mean is that we
will lose a load of that business, because actually it is the
big customers who use it.
Mr Crozier: Mike, this is where
regulation catches you because, clearly, if we want to give people
a discount, we have to be able to justify that on the basis of
the work that they give us and the work that they do, and, clearly,
unless they are posting at that level, we cannot justify those
discounts, therefore we would be non-compliant.
Q41 Miss Kirkbride: First of all,
you mentioned earlier about mail moving much faster to competition
than European rivals. Why is that and what is Europe doing to
force the pace of this? Why are we so much more ahead than the
others?
Mr Crozier: To be honest, I think
that is a question for Postcomm. It is very much driven by Postcomm.
Q42 Miss Kirkbride: Is there nothing
in Europe causing this?
Mr Crozier: There is nothing in
Europe. In fact, to be honest, it is quite the opposite, not surprisingly,
and most people are now building barriers to make sure that does
not happen. I think we are very much atypical in a sense, and,
again, just to repeat it so we are clear, we are not anti-competition
at all. In many ways it is helping us to drive through a lot of
the changes in attitude, culture and behaviour and things that
we need to take our business on as long as it is done in a level
way, and that is what concerns us. We are way in front.
Q43 Miss Kirkbride: I suppose the
reason why there is regulation of what you do is because of the
final mile. It is because it actually is not that easy to replicate
all these postmen running round the country in their little vans
going down country lanes, etcetera. You said earlier that you
thought that an alternative delivery service would emerge in the
big cities. I wonder if you could explain to me what kind of business
that is, because I do not really understand your business but
it would seem to me that a lot of the stuff that is going to be
taken away from you is Nat West banking or O2's account, and they
could live anywhere. They could live on the Isle of Skye or they
could live in Bromsgrove or they could live anywhere. Therefore
setting up a city delivery service is not going to help that.
What kind of business would make it worthwhile people setting
up a cherry-picked delivery service for the final mile? Who are
they?
Mr Crozier: There are two ways
in which they might do that, they could do a mix of the two as
well. They are not necessarily mutually exclusive. The simplest
way is to set up a city delivery, just pick the major cities and
to take all of O2's mail—to use the example you gave, or
whoever it might be—and to deliver themselves, to collect,
ship and deliver all the mail in those cities, to then take the
mail that goes to all those other customers and metaphorically
put it in the post box so that we are delivering all the unprofitable
stuff and they are delivering the profitable stuff. The second
way they can do it is that a lot of the bigger customers are less
interested in speed (i.e. the next day) and more interested in
reliability, and so the way that they could also provide the final
mile in all the other areas is to do a once a week delivery. It
is only through the USO that we deliver to every address every
day. They could quite easily decide just to deliver once a week
in each of those other areas. So they could do either of those
two things or a combination of those two things.
Mr Leighton: The way I would look
at it is I always think about what would I do if I was in competition.
I would build a couple of mail centres. That would cost me £35
million each. So I would put £70 million of capital down.
Then I would go to the top 70 accounts, all roughly in London—
Mr Crozier: Try not to give too
many people too many ideas!
Mr Leighton: Because everyone
says how easy or difficult it is, so that tells you how much the
capital is. Then I would go and get five or ten per cent of their
business, and I would collect their business, I would put it through
my mail centres, I would drop it off into our mail centres and
get access to delivery and I would make a lot of money.
Mr Crozier: There are two things
worth remembering. We have a huge fixed cost-base, because no
matter how much business we lose we still have to deliver to every
house every day. A certain amount of work goes with that no matter
what the size of the company. The second thing is, unlike other
utilities, we are very dependent on GDP for growth or non-growth,
we are a barometer of the economy, because people cut back when
things are tough, they spend more when things are not. We are
not a copper wire, or a pipeline, or anything, we are people,
so again it is a fundamental difference on our business from some
of the other ones that perhaps regulation is more used to working
with.
Q44 Miss Kirkbride: Basically your
picture would be that if you could price competitively with your
business mail then you would be happy to compromise on the USO
social mail, but on bulk business mailing, if you could . . .
Mr Crozier: We have to be able
to price and compete on the business side because that is the
only bit that would be competitive, and part of bringing those
prices down or holding those prices will be the need for social
mail stamp prices to go up a little bit, because clearly you have
to balance between the two, and that is—we are back to where
we started earlier today—the basic cross-subsidy that exists,
as it does in every original monopoly.
Q45 Mr Weir: We have touched on price
and price controls to some extent. Obviously you are not happy
with what Postcomm are proposing, but what alternatives to Postcomm's
price control proposals have you investigated?
Mr Crozier: The most basic thing
that needs to be right is that prices need to be cost reflective.
Any customer has the right to expect that the price that they
pay bears some resemblance to the cost of providing the service
that they are buying. It cannot be right that people currently
pay 30 pence for a service that costs 35 pence, and the true economic
cost is probably 45 pence, so clearly there is a difference there.
Our proposals are very clear that by 2009-2010 we would like to
see a first-class stamp price of 39 pence.
Q46 Chairman: How much?
Mr Crozier: Thirty-nine pence
by 2009-2010.
Mr Leighton: Four years' time.
Mr Crozier: Which is still well
below the true economic cost of 45 pence and would still make
us pretty much the cheapest country in Europe by quite some way.
Our view is that if we do that sensibly over a period of time
with rebalancing, that has got to be better than the USO hitting
some real problems and then needing an enormous fix further down
the line.
Q47 Chairman: You mentioned earlier
the concept of zonal pricing between rural and urban areas. I
understand what you are saying about social mail, but there are
businesses in rural areas as well. You are citing the Swedish
example, which sounds to me very much like you perceive that the
cost of delivering in rural areas... You already say in your submission
that there is a much higher cost for delivering in rural areas
than there is in urban areas. Is the subtext to this that delivery
in rural areas is going to be more expensive to the customer than
delivery in urban areas once we have liberalisation? However you
want to dress it up, that is the subtext that seems to be coming
through here. You will have a Universal Service Obligation at
point X but you will be under-cutting that, at least for business
customers, within urban areas so that the Universal Service Obligation
will, if you like, become the maximum price which will be paid
by rural areas whereas a much lower price or substantially lower
price will be paid in urban areas?
Mr Smith: The thing to remember
is that it is the posting customer that pays. So someone posting,
a business posting to a rural area will pay more than a business
posting to an urban area.
Q48 Chairman: You talk about businesses—I
find it difficult to get my head round this—you talk about
mail sort, you talk about business mail, are you talking purely
about bulk business postings? It seems to me the small business
is writing out to customers in rural areas, in effect they are
going to have to pay the cost of the social mail because they
are not going to be able to get into this large-scale mail, so
the cost to business in rural areas who are dealing with relatively
small volumes of mail could increase quite substantially. Would
you agree on that?
Mr Leighton: I do not know if
I agree or not. It is a bit complicated.
Q49 Chairman: It is not that complicated.
Mr Leighton: Let me come at it
the other way round. If the point you are trying to make is if
you are a rural business it is not very good for you, I am not
sure that is the case. That is the point. It goes back to Adam's
point. We have our friends from the press here and before you
know where we are it is a 39p stamp. Let us be very clear. We
are talking about a 39p stamp in four years time of which the
economic price of delivery will be 45 pence.
Q50 Chairman: I understand that.
You are getting away from the point. The point I am trying to
get to is to this. You are talking about lower costs for businesses
based on large-scale bulk mailing, the mail sorts and such like.
You also made the point earlier that most of your customers, less
than two per cent, can do this mail sort because of the volumes
required. Following the logic of that, most small businesses do
not use mail sort so the costs to them are about to increase.
Is that not the case?
Mr Leighton: On the assumption
that if you put the price of the stamp up, that is an increase,
yes.
Q51 Chairman: Yes. They are going
to increase, but if you are only reducing costs to businesses
for the large scale, there will be a disproportionately high cost
for smaller businesses?
Mr Smith: That is not quite true,
because what you will see also is that we are proposing to increase
the discounts for people who use meter products or pre-paid postage
products as opposed to stamps, as most small businesses do. They
use meter mail and PPI.
Mr Leighton: If the price of a
stamp goes up, does it mean that people are paying more? Yes,
it does.
Q52 Anne Moffat: Not much more, because
it was the price of the stamps. What about the second-class stamp,
and will you be able to link the price increases to improving
the quality of service or is it just to keep a level playing field?
Mr Crozier: With second-class
we have got to 29 pence in the same time period, which is not
much. The quality of service: we are now producing our best quality
of service results literally in our history. We are currently
up to about 94 per cent next day delivery for first-class mail.
We have never been at those levels before. The great thing from
our point of view is that we have now been consistently delivering
on target first-class mail for about 15 months, and we really
have built on that base. I think that is because people rightly
assumed in some ways that a lot of the changes we made were about
cutting costs, but they were also designed to improve quality
of service, and they genuinely have delivered that on the ground.
We are seeing that right across the country and, clearly, we think
there is the opportunity to continue to improve that, because
in any competitive market your quality of service is absolutely
crucial. Why do people want to stay with us? It is because we
provide a great service. It has got to be the number one priority.
It has to be.
Mr Leighton: When you earlier
pointed out: why would we want to maintain the USO as it is, which
is five days and a Saturday, is that as soon as you start taking
away from quality of service that is an issue for us. We also
collect on a Sunday. You can look at the economic costs of delivering
on a Saturday and collecting on a Sunday and you have not got
a very strong case. Actually if you then say, but that is what
there is today, that is the benchmark and that is what our competitors
have to be up against, we are very much in a position of saying
we have got to improve services rather than take them away, and
that is fundamental for us.
Q53 Sir Robert Smith: In answer to
Michael Weir's question you did not mention obviously that the
rural delivery costs you more, and therefore, although you say
the poster is the customer, the person paying the postage, what
we have seen with parcels in the Islands and the more remote parts
of the UK is that you are no longer a customer because the complete
opening up of the parcels market and cost reflective pricing in
those rural and remote areas meant that basically people said,
"We will deliver to you anywhere in the UK as long as it
is not in the Highlands or the Islands of Scotland." The
worry could be that whilst you have a Universal Service Obligation,
if your bulk mailers start to see a real difference in price for
reaching those last few customers, they start to put a surcharge
on to their customers and therefore the universal service disappears
in terms of the recipient of mail in this country.
Mr Leighton: That is a potential
issue, but I think the whole thing—. Going back to the USO,
the bits that we can drive, the bits that we can control, we fundamentally
believe that we have to keep it in place as it is, and, as I say,
both Adam and I over a period of time, it is the heart of what
we do. The USP of the Royal Mail is the USO, every day, the same
price everywhere, and certainly while we are around that will
be the case.
Mr Bone: I am beginning to think that
I am listening to a monopoly industry here, or a nationalised
industry, defending greatly the need to stick the price of stamps
up and forgetting to look at the efficiencies of delivery. You
talk about putting stamp prices up over the next few years, but
you could also be looking at reducing the costs of your delivery
and being more efficient and helping the consumer in that way,
or have I got that wrong?
Mr Hoyle: You mean scrap their own deliveries?
Q54 Mr Bone: No, I am suggesting
that the quality of service would be a more efficient way of doing
it, which is what other businesses have to do?
Mr Leighton: Can I answer your
question by asking one specific?
Q55 Mr Bone: You are looking for
one and a half per cent service and efficiency, Postcomm is looking
for three per cent.
Mr Leighton: Let us come to Peter's
first question, and you are right to raise the point, and we are
a monopoly, but let us just position ourselves where we have come
from. The reason the business survives today and is in a reasonably
good case is not because we acted like a monopoly, it is because
we drove the revenue up and took the costs down huge amounts.
We did not ask for a penny from anyone, we generated reasonable
levels of profit, generated a load of cash, got no debt, moved
everything around, changed the whole thing around. We have not
acted like a monopoly. Our performance in the last three years
will stack up to any company in Britain at any time. That is the
number one thing. The second thing is that the reason we did that
is that we could not rely on just putting the price of stamps
up, we have had to take the costs out of the business, we have
had to become more efficient, we have had to deliver more products,
we have had to do all the things that a normal company would do,
and our whole point is that I wish people would just treat us
like a normal company, because that is what is not happening to
us. Because we are a monopoly we have to have a regulated guardian.
Do not believe for one minute that this is a monopoly talking.
No monopoly I know has done what we have done in the last three
years. You will remember we have got 33,000 less people in this
organisation. You do not think we stripped costs out, talk to
them. This has been serious stuff.
Mr Crozier: Peter, to pick up
on your point, we do not want to put prices up. We want to rebalance
prices. We need to put some up and we need to put some down. So
it works both ways. It is not just one thing. You have to have
both sides. That is the problem. We have taken £1.4 billion
worth of costs out of the business, we have parted company with
33,000 full-time people, 25,000 temporary people, we have made
a massive inroad into the cost base. Even with all those one-offs
during the renewal plan, we ran at 2.2 per cent efficiency above
inflation and wage inflation and all those things. The idea that
you can sustain that every year and actually put it up to three
per cent, we believe is not doable. We think one and a half per
cent net improvement is going to be going some to do that, and
again we are trying to push ourselves incredibly hard, as we have
done already, but also be realistic, because again, if you assume
you are going to get something which you are never going to get,
then all the risk is on the business, all the risk is on the USO
and you have to get the balance right. So we are far from a monopoly
sitting here being smug, actually we have done an incredible amount
to sort out this business, but let us be clear. The danger is
you get to the end of the three-year plan and everyone thinks
it is done. We have got some huge challenges. We have got a £4
billion pension deficit we have to fix, which is historical, we
need £2.2 billion to modernise the business and the only
way we are going to drive that efficiency is if we invest that
capital sum in automating our processes. You cannot have the efficiency
without putting some investment into the company. It is very important
we accept those challenges are still there. They have not magically
gone away.
Q56 Miss Kirkbride: I just want to
finish off the point about the business service and how you would
like that to be the unregulated bit, without the price control
on it. I suppose the comparison Postcomm might be making is BT
where the copper wire is the end of the line and your copper wires
are your postman, etc; they are not that easily replaceable, it
cannot be done overnight, and you have got a monopolistic position
on that. So what is your answer? If you do not have price control
on some of your service provider business then why should you
not abuse your monopolistic position by increasing the price in
a disadvantageous way, thereby preventing competition? What is
the answer to that?
Mr Leighton: The simple answer
is we would lose business.
Q57 Miss Kirkbride: Not in the short
term.
Mr Leighton: We would. We could
lose it now. We are exactly the same as everybody else; if you
did not need to price up in any business you would not price up;
in fact, you would always try and price down because you get more
business that way round. The fact of the matter is that if we
priced up, if we used that in business, then I can guarantee we
will lose a bucket-load of market share. That is the answer. It
is as simple as that.
Q58 Roger Berry: Can we turn to the
£4 billion pension deficit?
Mr Leighton: Do we have to?
Q59 Roger Berry: Yes, please, because
(a), as you rightly point out, it makes you technically insolvent,
but (b) you identify the solution as being (to use your phrase)
"creating the right pricing framework", which basically
does mean, does it not, that consumers will have to pay more for
their postage? I understand that. My question is: have you looked
at alternative ways of dealing with the £4 billion pension
deficit other than through charging customers more?
Mr Crozier: We currently pay £400
million a year into the pension fund, about £140-150 million
of which is historical deficit. With the change to FRS17 that
payment will go up next year to about £800 million, with
somewhere between £400-500 million a year of that being historical
pension deficit. So it is the historical part that is a real issue.
Clearly, we can look at lots of ideas as to how we might look
at that liability going forward, but what that does not do is
sort out the historical part of it. That is the real nub of the
issue—for the regulator as well, in fairness. Again, just
to be clear, the prices that we mentioned, including the 39p,
take that pension issue into account, so it is not "add more
money on top of that"; that is what we are proposing as the
39p in 2009-10.
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